Archive for the ‘Reits’ Category

Since the start of last year emerging-market stocks have trailed their rich-world peers. Currencies are falling. Worst-hit is the Russian rouble, which has fallen by 30% against the dollar this year. The currencies of other biggish emerging markets, such as Brazil, Turkey and South Africa, have also weakened. For such economies growth is harder to come by. The IMF recently cut its forecasts for emerging markets by more than for rich countries. But India is a notable exception to the general pessimism. Its stockmarket has touched new highs. The rupee is stable. And the IMF nudged up its 2014 growth forecast for India to 5.8%. That figure is still quite low: growth rates of 8-9% have been more typical. But in comparison with others it is almost a boom. Why is India doing better than most emerging markets?

In part optimism about India owes to its newish government.

The other reason is that The currents that sway the global economy presently—the dollar’s strength; slowdown in China; aggressive money-printing in Japan; stagnation in the euro zone and falling oil prices—are less harmful to India than to most emerging markets.

I’ve had exposure to India via the Ascendas India biz trust since 2008. It’s been a ride but the payouts are very decent. Chk it out as you too may like it. http://aitrust.listedcompany.com/newsroom/20140710_170824_CY6U_ANGLIE824Z3T5WVH.1.pdf

BOND KING’S MANTRA LIVES ON William H. Gross may have departed Pimco, but executives at the bond giant have embraced his view that a stagnating global economy will force central banks to keep interest rates low, Landon Thomas Jr. writes in DealBook. …

Before he left the firm, Mr. Gross called his insight the “new neutral,” and Pimco is showing no signs of abandoning its departed leader’s mantra. In so doing, the firm’s executives are making the case that the Pimco bond funds that have made investments based on this economic approach will not soon change their strategy. Daniel Ivascyn, who was appointed to succeed Mr. Gross as group chief investment officer, took pains to point out that this new investment tack had many fathers, and emerged from a Pimco-wide brainstorming session this spring. But it is also true that the notion never really took off until Mr. Gross pitched it at an investor conference while wearing sunglasses, Mr. Thomas writes.

Mr. Gross’s economic predictions have failed in the past, but Pimco looks to be on firmer ground this time around. Like Mr. Gross, a number of economists believe that a mix of high debt, low growth and disinflation will force central banks around the world to keep rates from rising. Before he left Pimco, Mr. Gross had begun to invest in riskier, higher-yielding securities like government bonds in Italy and Spain and corporate bonds in Brazil, a strategy that the firm is still following. …

NYT’s Dealbook

Well the equivalent of these in equities would be Reits and other high yielders. Interestingly, FT reports that the fund mgr of Schroders flagship UK fund thinks there is value in income producing equities.

And an alternative view: We are doomed, doomed. Central banks cannot prevent deflation of everything including assets.

… listed developers and real-estate investment trusts (REITs) face their heaviest burden of near-term maturities on record just as home prices drop.

The 80 property companies on Singapore’s stock exchange reported a combined S$23.5 billion of borrowings that have to be repaid within a year in their latest filings, Bloomberg-compiled data show. The looming debt wall comes as the vacancy rate for condominiums soared to the highest since 2006, pushing prices to the lowest in almost two years, data from the Urban Redevelopment Authority (URA) showed.

Savills predicts refinancing for home builders and REITs will be more challenging as Singapore’s economy slows, with expansion cooling to 2.4 per cent in the second quarter, from 4.8 per cent in the previous three months. Population growth on the island is at a 10-year low and Standard & Poor’s expects home prices have further to fall.

“We’re at that point in the cycle when every quarter you’re seeing selling prices come down a little bit and secondary market transactions aren’t very active,” said Ms Kah Ling Chan, a property analyst at S&P in Singapore. “I suspect we haven’t seen the bottom yet.” Bloomberg

But Frasers Commercial Trust (FCOT) has obtained enough loan facilities to refinance all of its outstanding borrowings, most of which would have been due in the next financial year.

The commercial real estate investment trust (Reit) announced on Monday that it had obtained a S$365 million five-year syndicated term loan facility and a S$180 million three-year syndicated term loan facility.

It had also taken an A$135 million (S$154 million) four-year syndicated term loan facility.

The new facilities are unsecured and are expected to be used by end-September to refinance all of the trust’s outstanding loan facilities. (BT 16 September).

I had been thinking of selling FCOT because its tai kor (Thai tycoon that controls F&N is up to his eyeballs in debt) and because of the debts coming due at FCOT. I’ll hang on a bit more as mgt is innovative as this 2012 deal shows..

But in general,

REITs are in better shape than listed developers because they started refinancing with longer tenor debt ahead of rising interest rates, said S&P.

“For the REITs, I don’t see a major problem yet,” Ms Chan said. “The bigger players are still getting good rates and valuations haven’t fallen dramatically,” she said.

Other bits of Bloomberg’s report.

Developers

Developers of residential homes are suffering not so much from lower selling prices than “collapsed” sales volumes, said Mr Alan Cheong, a senior director of real-estate research at Savills in Singapore.

Secondary home sales plunged to the lowest since 2003 in the first quarter, URA data showed, and as business slows, builders with less pre-sales money to finish projects have to rely on loans, boosting short-term borrowings, he said by phone on Oct 2.

Despite the weaker demand, the number of new residential dwellings being built remains high. Units under construction reached a record in the second quarter of last year and about 65,270 apartments were in the pipeline as of June 30, URA data show.

Regulatory measures have been introduced to damp the market. Between 2009 and mid-2013, the Monetary Authority of Singapore implemented eight rounds of property cooling measures to address concerns the low interest rate environment would lead to a property price bubble, Moody’s Investors Service said in an Oct 6 report.

Appetite to buy is already curbed and rents could fall further, said S&P’s Ms Chan. “We haven’t seen the full impact yet.”

The 42 listed developers on Singapore’s exchange reported S$13.4 billion of short-term borrowings in their latest filings, 42.5 per cent more than a year earlier, data compiled by Bloomberg showed.

City Developments posted debt of S$1.66 billion in the second quarter, 48.6 per cent more than at the end of 2013. Second-quarter net income fell 33 per cent, it said in August, and the company is looking to expand overseas to offset declining demand in Singapore. A spokeswoman for City Developments said the company has a strong financial position, noting its cash of S$3.4 billion and 33 per cent net gearing ratio.

The three-month swap offer rate, a measure of borrowing costs in Singapore, touched 0.2561 per cent on Sept 16, the highest since June last year.

…

Hiap Hoe, which recently started selling apartments in its prestigious Skyline 360 building, reported short-term borrowings of S$287.6 million for the quarter to June 30, 94 per cent more than the S$147.9 million for the three months to December. A spokesman for Hiap Hoe declined to comment.

Developers on the island are changing their business models and reducing exposure to the local market, said Singapore-based Mr Tim Gibson, who helps run Henderson Global Investors’ global property equities fund.

“By buying Singapore developers now you’re really buying exposure outside of Singapore and into markets like China,” he said in an interview on Oct 8. It “doesn’t give you a huge amount of confidence that a turnaround in the residential market is coming any time soon”, he added.

Starhill Reit/ Retail Reits

Starhill Global REIT, which has S$124 million of notes that mature in July, reported S$129.1 million of short-term borrowings as of June 30, more than double the amount it had in December last year.

Retail occupancy rates at the trust’s flagship Wisma Atria mall along Singapore’s Orchard Road slipped to 98.5 per cent in June from 99.5 per cent at the end of 2012, company data showed. Office occupancy rates are 100 per cent.

Mr Jonathan Kuah, a Singapore-based spokesman for Starhill, said the company has already refinanced its debt due within the coming 12 months. “The leverage situation hasn’t worsened,” he said by email on Oct 7.

Retail sales, which affect revenue at some REITs, decreased for four of the past five months, the worst performance in two years, data from Singapore’s Department of Statistics showed. Excluding motor vehicles, sales dropped 0.4 per cent in July versus the previous corresponding period.

“Singaporeans don’t shop here any more,” Savills’ Mr Cheong said. “Travelling has become so cheap and they buy more stuff on the Internet. The Chinese have also been avoiding Singapore, Malaysia and Thailand since the MH370 tragedy,” he added, referring to the Malaysia Airlines flight missing since March.

Arrivals of tourists from North Asia, which typically comprise more than a quarter of visitors, slumped almost 13 per cent the first seven months of 2014 from a year earlier, Singapore Tourism Board data showed.

“In 2008, when the refinancing situation was quite bad, the REITs still managed to pull through,” said Mr Danny Tan, a Singapore-based fund manager at Eastspring Investments, which managed US$115 billion (S$146 billion) of assets as of June 30. “There’s a high probability these REITs will be able to refinance especially because the loan market is also open to them.”

Lippo Malls Indonesia Retail Trust (LMIR Trust) plans to bulk up its portfolio by acquiring a five-storey shopping centre in southern Jakarta, Indonesia, for 3.6 trillion rupiah (S$385.7 million) which it plans to pay with cash and new units.

The acquisition of Lippo Mall Kemang (LMK) from PT Almaron Perkasa – a company incorporated in Indonesia which is 92 per cent indirectly owned by the trust’s sponsor PT Lippo Karawaci – could potentially raise the trust’s portfolio by 27 per cent from S$1.42 billion as at end-June to S$1.8 billion.

LMIR Trust’s manager, LMIRT Management, has proposed to issue up to 301.37 million new units to PT Almaron Perkasa, which under the conditional sale and purchase agreement signed on Sept 14 will receive 3.18 trillion rupiah in cash and 420 billion rupiah in units for LMK.

The firm deemed the deal to buy LMK, which enjoyed a high occupancy rate of 93 per cent as at June this year, a “strategic acquisition of a prominent retail mall” located close to residential apartments, a hotel, a wedding chapel, a school and a country club. LMK also serves as the podium of the proposed JW Marriott Hotel, Pelita Harapan school campus, a planned hospital and three condominium towers. (BT this week)

And

From now till end-March 2017, acquisition strategies will be executed in full swing by Accordia Golf Trust (AGT).

The first Singapore-listed business trust with golf course assets in Japan, and also Asia’s first golf trust, AGT currently manages 89 golf courses in Japan, with a combined value of about 160 billion yen (S$1.89 billion).

Together with its sponsor company, Tokyo-listed Accordia Golf, they own 133 golf courses in Japan, and they are the largest golf operator in Japan, with a 5.5 per cent share of the market.

In a media briefing on Monday, chief executive officer Yoshihiko Machida said the trust is now poised to acquire an additional 50 billion yen worth of golf assets, with a preference for 19 golf courses currently owned by Accordia Golf, of which AGT has the first call options right to purchase. (BT this week)

I own a bit of the former and and still thinking of the latter. The issue with these is the strong S$. (Yen was at an all time low against S$ this week).

Charoen’s empire (Remember he is bidding to buy OCBC group’s shares in UE).

Those who own Frasers’ reits have to take account of the increased risk profile of the reits. There is no longer cash rich, conservative F&N as the fall back, indulgent parent (it rescued FCT by injecting a valuable asset in the 2007/ 2008crisis). There is a Thai billionaire who it seems is geared to his eye-balls and more. In the 1997/ 1998 crisis, he nearly went bust.

When it comes to Reits, I’m almost like Pussy Lim saying the PAP is doomed (since 1990s), though she recently nuanced her remarks and Roy on the govt “stealing” (my take on what he is claiming, not his word) CPF. Same old messages.

Here’s a variation on my Reits tale. I’m looking at a Reits’ strategy to guard against the effects of likely interest rate rises*. I’m looking at a“core plus” or “value add” strategy: Reits that buy underperforming assets, for example a building with empty space, and focuses on improving returns, for instance by increasing occupancy.

Or Reits outside traditional core commercial real estate include student housing, medical offices, storage and even social housing. I’ll be looking at the Jap Golf Reit.

If I find Reits that are executing this “core plus” or “value add” strategy competently, I’ll switch to them even if their yields are lower. Let you know my conclusions after I do the switches.

BTW, Bank of S’pore, OCBC’s private bank, is recommending Reits and other income plays.

Sounds like what I’ve been doing, suggesting the last few yrs. Maybe I can be Bank of Singapore’s strategist?

Singapore equities will remain range-bound for the short term, but dividend plays will continue to attract interest, said BoS’s CIO on July 3.

“… certain interesting themes in the Singapore market, and one of which … there are many opportunities in the dividend yielding sector, ‘REITs’, some of those Temasek-linked companies** do give you a very nice yield in the context of a very low yielding environment in the world,” said Chief Investment Officer Hou Wey Fook.

BOS says the impact of a slowing Chinese economy on Singapore’s growth will likely be offset by the pick-up in the developed economies. This combined with the steady performance of emerging economies will deliver the best global economic outlook in 2014, since three years ago. (BT report)

BoS, like me, says it prefers equities to fixed income due to falling bond yields and soaring stock market indices. It also expects the improving growth momentum to spur companies into increasing their capital expenditure and M&A activities.

——-

*Keep an eie on the junk bond market. It’s going through a serious correction that could turn into a collapse given that many say the junk bond is a bubble.

Yes but saying I’m still invested in reits and dividend paying stocks, I know I’m sounding like Msian Cina New Citizen Pussy Lim playing her broken record or CD of “The PAP are doomed” (first version 199o something) and repeated at regular intervals. BTW she’s the best ad for the Malay ultras and their slogan “Apa lagi Cina mahu?”. The PAP govt gave her citizenship and a cushy job teaching teachers (She bitched or catted at fellow lecturers: once asked students if fellow lecturer, a scholar, was gay. This was in the 80s and could have ruined his career: it didn’t as students reported her actions, and she was warned to stop) and she see how she repaid the PAP: sliming PAP.

Sorry, back to reits and dividend paying shares.

Defensive leh. No-one knows why things are the way they are

The world of finance is ensnared in a triple mystery: falling bond yields, falling inflation and rising debt. The ignorance is dangerous.

(The first two implies deflation, the last implies inflation as defaltion increases the debt durden: ask the Japs)

Investors and lenders are equally at a loss. They might want to prepare for deflation. But it is always possible that they should be preparing for a new mystery: the long-delayed return of inflation.

Or as the chief investment strategist at BofA-Merrill Lynch puts it. “The ‘fire’ of zero interest rates and central bank liquidity continues to be doused by the ‘ice’ of deleveraging, regulation and deflationary technology innovation.”

Or is possible that financial markets are simply adjusting to reflect this new economic reality, rather than being complacent?

Edward Hadas, economics editor at the commentary website Breakingviews, believes that the world economy is in unchartered territory – so no one really knows what might happen.

“We are dealing with something we have never seen before: very low volatility in such uncertain economic times,” he says.

Low volatility is supposed to imply calm and confidence. But he sees no evidence that investors are not aware of the global economic risks. In the media and among the commentariat in the City, there are plenty of warnings that challenges remain.

Mr Hadas wonders if the low volatility is due to more mundane factors: the banks that provide most of the funding for traders are under capital pressure.

“The result is less activity, less volatility and a greater correspondence of markets with reality,” he said.

But he warns: “Sadly, the calm is probably temporary. Traders will re-group and become more active once they adjust to the new funding environment. And whenever economic reality does change sharply, investors can be counted on to overreact.”

So I’m playing safe. I avoid bonds and buy shares and reits that I think can continue paying decent payouts, and I bank the payouts, not reinvest them. And I keep my spare cash in CPF. At this point in time, CPF pays the best risk adjusted S$ returns. Not saying much, though.

BTW experts were saying last Dec and in Jan that bonds and reits were history. They outperformed.

However, experts warn investors should not be lured by high dividend payouts from individual companies, as this can entail risk. Instead, they note that dividend growth can result in much higher returns.

“Chasing a high dividend is a risky strategy; the yield might look attractive, but the risk is the dividend gets cut and the share price falls further,” said Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

“The share price may have already fallen to reflect expectations the dividend will be cut – meaning the yield would then have risen,” he added. “We saw this in 2008/09 when the banks all had high yields but were not going to be paying dividends for many years.”

Investors should instead look for growing income, as these companies are likely to be financially more robust, growing their capital base.

And here’s a gd BT article on evaluating Reits: http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={651562920-19895-7719950079} High yields do not mean a Reit is an attractive buy, however. Yields are related to risk and growth potential, as investor Bobby Jayaraman pointed out in his 2012 book on Reit investing, Building Wealth Through Reits. The safer the Reit and the higher its growth potential, the lower its yields will be. This is because high demand from investors forthese assets pushes up their price, thus lowering yields.

“The government has underestimated the impact of high business costs on our future economy,” said Inderjit Singh (Ang Mo Kio), urging the government to set up a cost competitiveness committee to tackle the root causes of soaring costs before SMEs and MNCs relocate with jobs in tow. He also asked the government to reverse its land divestment policy, which he deems a key reason behind high industrial rents.

Companies are facing a “triple whammy” of rising rents and utility bills, growing wage costs, and a shortage of workers, said Mr Singh, himself a businessman. And this “chronic” cost issue does not affect SMEs alone. “The top management of some large MNCs here … have expressed their serious concerns about the unrelenting increases of the cost of doing business coupled with the unavailability of workers,” he said.

Iskandar’s industrial parks are a “huge threat”, he said. If Singapore’s SMEs are forced to move to Johor, MNCs may follow their SME suppliers and subcontractors. “The exodus may be larger than we imagine … We risk hollowing out our economy in the future, and I would like to sound an alarm that we are close to the tipping point.”…

Though he acknowledged that PIC and PIC+ would help with topline revenues growth, Mr Singh said: “We are just trying to do too many things too fast, and this is hurting many companies.”

Both he and nominated MP R Dhinakaran, who is also managing director of Jay Gee Group, pointed to rising industrial and commercial rents as a key culprit of the high costs of doing business in Singapore.

Citing Association of Small and Medium Enterprises president Kurt Wee’s comment at BT’s Budget Roundtable that rents rise as much as three-fold when leases are renewed, Mr Dhinakaran said: “In this economic climate, rental increases of this magnitude will be fatal for a large number of SMEs.”

Both Mr Singh and Mr Dhinakaran also linked the high rental costs to the government’s land divestment policy. “JTC was a landlord for 18 per cent of industrial property some 10 years ago, but today manages only 3 per cent of the market. This is a huge shift, and the government lost the ability to influence rental prices resulting in developers and investors making the money,” said Mr Singh.

“We have to reverse this policy, even if it means the government having to buy back some of the Reits. In any case, the biggest Reit players are government-linked entities like Mapletree and CapitaLand,” he added.

But she also said that business rents need “the touch of the State”, and asked the government to consider “cooling measures, especially for business rents”.

BT 5 March

Given that Ascendas (a GLC) is the biggest player in the industrial land arena: why do you think when the govt says this?

The government will intervene if it sees evidence of collusion or the abuse of market dominance by any landlord – including real estate investment trusts (Reits), said Minister of State for Trade and Industry Teo Ser Luck … in Parliament … calls for help with climbing business costs (and in particular, the affordability of business space) have grown louder both in and outside of Parliament in recent months.

Reits – some of which were formed after JTC and HDB divested space to private owners – have been blamed for shorter lease renewals and sharper spikes in rentals.

“We know that it has come up as an issue, many of you have raised it. We will monitor it,” said Mr Teo.

At the same time, he noted that “Reits are not necessarily the leading players in the rental space market, because they currently only own about 13 per cent and 16 per cent of retail and industrial rental spaces respectively. Like any other landlord, they have to compete in the rental market to attract tenants and cannot charge excessive rents”.

Mr Teo also said that rents for space are likely to moderate in the medium term, as the government has released a “significant amount of land”.

Over the next three years, about 145,000 square metres of new shop space will be completed each year. Over the same period, an average of 500,000 square metres of multiple-user factory space will come on-stream each year.

For the former, that represents more than double the average annual demand for such space in the last three years; for the latter, it is just under double.

(BT 7 March)

Silicon Valley S’pore style?

Entrepreneurship will also receive a boost, since by the end of this year, JTC will open two more blocks to incubate start-ups, as part of a cluster called JTC LaunchPad@one-north.

The percentage difference (48%) between the two numbers is the willingness that holders of the units are willing to accept (whether they realise it or not) for the higher (but not assured) payout. If Reits, reduce their payouts, the price falls to compensate for the reduced yield. Even if the payout remains constant, high yielding shares are only a good investment if a falling share price does not undo the yield return.

As there are many other Reits that have better yields, reit investors should be mindful of the risk they are assuming in chasing higher yields.

When ST talks down Reits, as it has been recently, because interest rates are rising, it’s time think again. Remember its big-balls up when Reits were at their (with hindsight) their peak in May last yr?

Here’s some stuff that appeared in reference with US Reits but is applicable here: While REIT investors did an about-face following the Fed’s tapering announcement, some industry experts say all the attention surrounding interest rates and REITs is unfounded. “Ever since May 22, there’s been this discussion about the role of interest rates in REIT returns – and it’s a very strange discussion,” said Brad Case, VP of Research with the National Association of Real Estate Investment Trusts (NAREIT) in a recent interview with CoStar News. “Because the truth is, when interest rates go up, it usually means the economy is strengthening. That’s good news for REITs and means that returns will be strong.” In support of this statement, Case pointed out that REITs have performed well in 12 out of 16 periods of interest rate increases since 1995.

But be prepared that they underperform other types of “shares”

While there is controversy regarding the degree to which interest rates affect REITs, Affleck pointed out that investors need to consider more than just how REITs perform when interest rates change. “The relevant measure is not whether REITs have done well during interest rate increases, but how they performed relative to the broader market,” Affleck said. “On that count, the data are definitive – REIT performance relative to the broad market is inversely related to interest rate movements.” Affleck added that REITs outperformed the broad market – gaining 27% compared to a 20% gain for theS&P 500– when interest rates fell from 3.5% in March 2011 to 1.5% in April 2013.

Juz take the payouts and bank them. But remember that Reits, unlike shares, pay out most of the income they get.When things go wrong (higher borrowing costs, lower rents), payouts suffer. No buffer, unlike comnpanies dividends. In the worse case, can end up having to subscribe to rights issues because Reits don’t have reserves to draw on in hard times.

[A] Monetary Authority of Singapore (MAS) report … warned that a rise in rates will hit Reits – and lower their dividends.

Reits own a portfolio of property and pay investors regular dividends out of their income – the property rentals received.

The central bank’s financial stability review noted that Reits need to distribute 90 per cent of any taxable income to unitholders.

So these vehicles have limited retained earnings and are dependent on capital markets and banks to meet their financing needs.

The MAS estimated that the ease with which Singapore-listed Reits would be able to pay their interest bills would fall markedly once interest rates headed north.

The median “interest cover” for Singapore-listed Reits would fall from 6.8 to 3.5 times if interest rates were to rise by 3 percentage points, the MAS estimated.

The interest cover is a ratio used to determine how easily a company can pay interest on its debt – the higher the ratio, the easier the interest can be paid.

The MAS also warned that higher interest rates would likely increase interest expenses and lead to lower dividend payouts. Reits might then appeal less to investors, capping their ability to raise more cash from capital markets.

On the bright side, the debt maturity profile of Reits is better now than before the global financial crisis in 2008 and 2009.

A smaller proportion of borrowings by Reits are due for refinancing in the next two years.

The MAS also issued a warning over the larger corporate sector.

“If interest rates were to rise from their currently low levels, firms’ debt-servicing burdens could increase significantly.”

Despite the recent turbulence, I’m still not a seller because the global economy (and S’pore’s) faces four potential outcomes: a return to healthy growth (in which case Reit incomes should rise); a low-growth, low-inflation period in the doldrums (in which case the income appeal of Reits should help); a return of rapid inflation (as a real asset, property should offer some protection and Reits offer property and leverage); or a deflationary slump. Only in the last case would property suffer. Three-out-of-four sounds good odd for any racing man. And the last in S’pore is impossible to imagine. Easier to imagine a S’pore where the PAP doesn’t form the govt.

Fee-fi-fo-fum; I smell the blood of reporters and analysts that were bullish on reits. Be they alive or be they dead, I’ll grind their bones to make my bread.

ST has finally given up promoting reits (something I’ve been bitching about recently here and here), reporting: MAYBANK Kim Eng Research has gone against the long-prevailing view and downgraded Singapore’s red-hot real estate investment trust (Reit) sector amid a period of increasing price volatility.

Reits have come under heavy selling pressure the past fortnight amid fears the golden days of low interest rates may be ending.

The FTSE ST Reit Index, which tracks the sector, dropped 1.68 per cent yesterday and is down 8.2 per cent since May 22, when the United States Federal Reserve’s chairman raised the possibility of ending its money-printing.

Gee, less than a month and two bullish stories, ST is now reporting bearish news on reits. Even when I waz an equities salesman, I didn’t change my views so fast. ST Money Desk practicing to be salespersons.

But before rushing into reits, think. The prices of reits were helped by institutional equity investors* buying them for the yield. Now those who chased yields in the equity markets may switch into cyclicals and defensives, if they think the yield party is over. If so buying into reits may face a stampede out of reits, and then relative underperformance.

—

*Remember, bond investors don’t buy reits. They stick to bonds, moving to junkier bonds for yield. When cautious, they sell the junk and buy US govt bonds.

Opps ST nearly did it again. On Saturday, an ST headline screamed: “Buying opportunity after Reits rout”. http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={498059457-17610-6138972043}. Market overall was off 24.6 points (0.74%), while the reits’ index was off a marginal 1.1 point.

Could have been worse. The last time ST promoted reits, ““It was no different in Singapore, where the benchmark Straits Times Index sank 61.2 points or 1.8 per cent to 3,393.17, its worst one-day plunge in percentage terms since its 2.2 per cent reverse on May 7 last year” (“Markets tumble amid US, China fears”: ST headline. Didn’t have the balls to tell us, reits here were off about 5%”https://atans1.wordpress.com/2013/05/28/bad-timing-st-article-on-reits/

On 23 May, Japan’s stock market fell by about 7%. “It was no different in Singapore, where the benchmark Straits Times Index sank 61.2 points or 1.8 per cent to 3,393.17, its worst one-day plunge in percentage terms since its 2.2 per cent reverse on May 7 last year” (“Markets tumble amid US, China fears”: ST headline. Didn’t have the balls to tell us, reits here were off about 5%*. They have since recovered slightly.

Fee-fi-fo-fum; I smell the blood of reporters and analysts. Be they alive or be they dead, I’ll grind their bones to make my bread.

Update after first publishing: Juz read in FT that while the Topix index is down 10%, reits there down 1%. Seems investors want to own real assets, given that Japan wants to raise inflation.

Update, Update: However, there are three good reasons why stock markets, a few blips aside, will continue to grow for some time: central banks are scared; there is lots of money waiting to be invested; and returns on all other assets are low … Strapped to these three rockets, the market can still soar. Of course, Spain could yet go bust or China grind to a halt. There could be a natural disaster, an act of terrorism or war. History tells us a bust is waiting down the track, but while the world economy recovers and governments and central banks maintain their pledge to keep printing money, we should expect prices to rise.
Phillip Inman from Guardian

Ong Kian Lin, an analyst with Maybank Kim Eng, wrote in a note dated March 22 that the recent S-Reit rally was not due to strong fundamentals but fuelled by inflated asset values from quantitative easing by the US Federal Reserve and ample liquidity.

He noted how retail and office property prices have gone up but rentals have been slow to catch up.

A Colliers International report reflected this divergence. As at the end of the first quarter of 2013, retail property rents in its areas of study have fallen from the previous quarter while capital values went up.

While maintaining a positive outlook for the retail and retail Reit sector, Savills’ Mr Cheong noted signs of trouble in that retail sales figures are trailing growth in areas such as tourist arrivals, population and inflation.

Retail sales fell 2.7 per cent in February. Tourist arrivals last year was 9.1 per cent higher than the year before. The consumer price index rose 3.5 per cent in February from a year ago. Total population growth was 2.5 per cent between 2011 and 2012.

The demand seen in the market right now is due to sentiment still being buoyant, Mr Cheong feels.

“At the moment it’s still rising, but it’s a binary issue. You cannot go and push to the tipping point, you push to the tipping point, everybody will bolt for the door like a fire in a cinema or retail mall. If everyone bolts for the door, everything will be vacated.”

NUS’ Prof Sing said retailers have increasing choices of malls. And the risk is that with greater choice, consumers may drift away from traditionally popular malls, leading to a downward spiral.

“When this happens, tenants will also start to move out. This cycle will continue, because you (as a manager) cannot pull in the crowd, I (as a retailer) cannot afford to pay such a high rent, I have to move out from the mall. So you put in another tenant that is not as good, so fewer people will come.”

Prof Sing and Knight Frank’s Mr Png said they are watching the Jurong East area, with several commercial and retail developments due for completion.

Retailers also have to cope with tighter foreign manpower policies.

“Much as the government would like to talk about productivity you find that retailers, the services business, is still very labour intensive,” Mr Png said.

Err the issue of inability to raise income could also apply across the board to office and industrial reits too, given the economic slow down. Price rises can only depend on yields going down. FTR, I own various Reits.

It prefers those with stronger earnings growth potential and/or have potential to deliver earnings surprises. Preferred S-Reits are Perennial China Retail Trust (PCRT), MGCCT and Cambridge Industrial Trust based on their upside potential.

PCRT is seen as attractive due to its valuations and earnings visibility as operations are ramping up at its malls. New development assets are also completed and seen generating cashflow. Target price is around $0.84.

As for Cambridge, its completed acquisitions and asset enhancement initiatives (AEIs) are expected to contribute positively. Its target price is seen around $0.93. I personally am not comfortable with Cambridge because it lacks a tai kor.

In SunT, the headline screamed,”Market risks ‘seem less threatening this year'”. Oh, dear. If ST reporters and editors are getting less cautious, isn’t this a contrarian sign. Maybe? But to be fair the forecast was made by a UOB Asset Management executive.

So far, as well documented here, I’ve been emphasising buying stocks with sustainable dividends or payouts, decent yields (slightly above our 5% inflation rate), with the possibility of capital appreciation. I’ve been long on smaller cap S-Reits that have tai-kors with money for several yrs. I’m not a buyer at these levels, but neither am I a seller. I’m a nervous holder. Until you cash out, the profits can evaporate. Taz why good, sustainable yields are important. But that means taking on more risk: Reits are not a play safe investment. Their gearing and the requirement to pay out 90% of their earnings, could result in investors coughing up in rights issue more than they got in payouts. Taz the reason for my nervousness.

Stocks on my watch list are SBS and SMRT. But they’ve been on my to buy watch list for three years already.

“Looking into 2013, we believe S-REITs would likely retain their shine, underpinned by three key drivers. First, the sector offers the highest yield spreads among its peers in other major markets. Second, S-REITs are likely to be in favour amid the uncertain macroeconomic outlook, given their defensive low beta nature. Lastly, the outlook and financial position of S-REITs are generally positive, which should translate to firm performances going forward.”

But the demand is underpinned by macroeconomic uncertainties that are expected to linger, and the fact that S-Reits’ yield spread remains one of the highest in the world, when compared to other major Reit markets, said Credit Suisse in a report issued on Thurday.

“In our view, S-Reits still offer an attractive investment proposition given yields of 5-6 per cent on average,” said Credit Suisse.

The weighted-average yield for S-Reits trading above US$1 million per day is at 5.5%, which implies that a further yield compression of 50 basis points should easily translate into about 10% share price appreciation, offering a total return of about 15%, added Credit Suisse.

The only problems, I have about trimming my portfolio is that that I hold “risker” Reits, and the payouts could increase.

OCBC Investment Research raised its fair value on Frasers Commercial Trust (FCT) to S$1.31 from S$1.23 while maintaining its “Buy” call. The interest savings arising from the early refinancing of a S$500 million loan facility and stronger rental income after the acquisition of direct tenant leases at China Square Central are also positives, OCBC Investment said. And after selling KeyPoint for S$360 million (US$292.7 million), FCT is likely to sit on net proceeds of S$357.8 million and book in a gain of S$72.8 million. Frasers is likely to use the bulk of the sale proceeds to redeem half of its series A convertible perpetual preferred units and reduce its existing debt, OCBC said.

DBS Vickers says, “We continue to like FCT due to its stable income profile and the positive impact coming in from its management execution, as evident in Causeway Point’s enhancement strategy. Thirdly, given that it’s trading above book, we see opportunities of inorganic growth.” What the last means is that FCT can issue new units to acquire properties.

Then there is Suntec REIT, with DBS Vickers citing its attractive yield and the positive earnings impact in the medium term from its asset enhancement initiatives.

Maybank Kim Eng, which earlier this week upgraded its rating on the REIT to “Buy” from “Hold”, while increasing its target price to S$1.66 from S$1.42, agrees citing as positives the progress of refurbishment work at Suntec Mall and Convention Centre and the near complete occupancy of its office portfolio against the negative of a looming supply glut.

FYI1, AIMS AMP Capital Industrial Reit portfolio value has risen by 5.6 per cent, said the Reit on Tuesday. Based on the new valuation made on September 30, 2012, the Reit’s portfolio is now valued at S$965.7 million. Its previous valuation was on March 31, 2012.

FYI2,Bloomberg reported last month that the local REIT market has led the global league table so far this year, returning an average 37 per cent. That is twice the gains in the United States, United Kingdom and Japan, according to Bloomberg data, and better than Australia, which advanced 24 per cent.

Lippo Karawacial is First Reit’s financial sponsor: “On 11 December 2006, Lippo Karawaci became the first company in South East Asia to list a Healthcare REIT on the Singapore Stock Exchange with Indonesian assets. Assets in the First REIT includes the Siloam Hospitals Lippo Village, Siloam Hospitals Kebon Jeruk, Siloam Hospitals Surabaya, Siloam Hospital Cikarang, Mochtar Riady Comperhensive Center and The Aryaduta Hotel and Country Club Karawaci, and four Singapore based properties.”

One of the sources told Reuters that first-round bids were below expectations, but the sale process will continue to give the buyers an opportunity to bid higher. It wasn’t clear how much the bidders had offered for the stake in the first round.

Blackstone, Bain Capital, KKR & Co and Dubai’s Abraaj Capital have been shortlisted for the second phase of an auction of a fifth of private Indonesian healthcare operator Siloam in a deal that could fetch as much as $300 million, sources said.

Seller PT Lippo Karawaci is seeking a valuation of more than 20 times Siloam’s forward core earnings for the stake, they said, declining to be named as the discussions were private. Siloam is the country’s biggest private hospital firm.

“Lippo may be back in the market next year if the valuation disparity is too big,” said one of the sources.

…

Lippo plans to sell a minimum 20 percent of unit Siloam Hospitals for between $200 million and $300 million, but could increase the stake to 49 percent if the price is right. It hired Bank of America Merrill Lynch to run the auction, sources have told Reuters earlier.

Might even be revised downwards. But Global buyout firms are keen on Indonesia’s consumer and healthcare sectors despite steep valuations, as they are betting on the country’s fast-growing economy.

Indonesia has one of the world’s lowest healthcare spending-to-GDP ratios, but its rising middle class – which represents more than half of its population of 240 million – is expected to sharply increase its medical spending and drive growth in the sector over the coming years.

“The healthcare sector still continues to remain the darling of private equity. Even with rich valuations it is easy to find bidders for this sector,” said Krishna Ramachandra, head of corporate finance and investment funds at law firm Duane Morris & Selvam LLP.

But a growing number of investment banks are advising clients that south-east Asian rivals such as Malaysia and Thailand now look more enticing than Indonesia. Morgan Stanley and Credit Suisse say the Indon economy is overheating. Barclays is relaxed abt the “problems”.

Here I prophesised that Far East Reit would be forced to increase the expected yield on its trust from a niggardly 6-6.5%.

Well Morocco Mole (sidekick to Secret Squirrel) tells me that the Reit, which owns hotels and serviced residences in Singapore has not changed its pricing, despite CDL’s yield of 6ish% and Ascendas Hos of almost 8%.

So don’t subscribe if you are hoping for a pop in the price on listing day. CDL looks a better yield play. Got public track record.

Ascendas Hospitality Trust (A-HTrust) closed at its issue price last Friday. Considering that the public offer was about 6.9 times subscribed and yields projected at 7.9% (FY13) and 8.0% (FY14), while CDL’s is 6% (admittedly that is trailing) and strong demand for the placement, I expected the securities to close higher.

Maybe it’s the structure? The A-HTrust is a ‘stapled security’ comprising the Ascendas Hospitality Business Trust (80%) and the Ascendas Hospitality Real Estate Investment Trust (20%).

Mr Tan Juay Hiang, chief executive, Ascendas Hospitality Trust, said earlier last week: “The REIT structure does allow unit holders and investors to enjoy a more tax efficient structure. And the business trust will allow the platform to look at the potential development projects, unlike the REIT there is a limitation. So on a staple securities basis, it does provide quite a fair bit of benefits for unit holders and investors.”

Maybe it’s because the trust said it’s looking at acquisitions to grow the value of its assets going forward. Rights issueS, more debt?

Maybe because as analysts said there are downside risks to hospitality trusts as the tourism market is highly sensitive to global downturns. Projections could go wrong.

Maybe it shouldn’t have allotted an additional 73.4 million securities to the placement tranche of its initial public offering in Singapore as part of its overallotment process?

Update on 31 July: Another reason could be that the assets are outside S’pore and investors place a premium on S’pore based assets. The reverse of the govt’s “FTs are betterest” policy.

Keep an eye on A-HTrust. Could be worth adding to portfolio for yield and capital appreciation. I like the combi of biz trust and Reit, though not sure if it will work in practice. Got to research the issue.

Far East Reit which owns hotels and serviced residences in Singapore, is being marketed at a yield of 6-6.5% Compares unfavourably about 7.9% offered for Ascendas Hospitality Trust (at issue price: expect it to fall to 6ish level when trading starts i.e. price moves up) and 6% for CDL Hospitality Trust

Indonesia’s PT Lippo Karawaci may sell as much as 49 percent of its unit Siloam Hospitals in a deal that would value the firm at more than $1 billion, drawing a slew of private equity firms to the sale as they bet on growth in healthcare spending in Southeast Asia’s biggest economy, sources said. Reuters

There is plenty of US private equity market sloshing around the region as article explains. And the IHH IPO and the coming one by Fortis (Religare Heath Trust) will ensure that the animal spirits of these investors remain bullish.

The Indon co is First Reit’s financial sponsor: “On 11 December 2006, Lippo Karawaci became the first company in South East Asia to list a Healthcare REIT on the Singapore Stock Exchange with Indonesian assets. Assets in the First REIT includes the Siloam Hospitals Lippo Village, Siloam Hospitals Kebon Jeruk, Siloam Hospitals Surabaya, Siloam Hospital Cikarang, Mochtar Riady Comperhensive Center and The Aryaduta Hotel and Country Club Karawaci, and four Singapore based properties.”

Kinda painful for me as I didn’t buy this Reit. Really dumb as I kept waiting price to correct. I aim to buy a Reit that is trading at a big discount to published NAV. The discount was smallish and now has disappeared. Big premium in fact.

Effectively it’s get the same yield but reducing the capital used by 31%, releasing the balance of 69% for hopefully more proftable use. Great financial engineering. F&N’s chairman should tell his sis-in-law at Temasek to pay F&N and FCOT to teach Temasek financial engineering.

And great insight by Investment Moats: worthy of a Buffett.

Bad PR by FCOT. It should enhance shareholder value be publicising its financial egineering skills.

Though must point out that the returns in Caroline’s case are in A$. Nevertheless …

But given that FCOT was gifted the Alexandra Technopark by F&N when F&N was trying to salvage its investment in FCOT during the financial crisis, there’s a danger that FCOT may have to return the favour. I was surprised that F&N shareholders did not kick up a fuss as the valuation then looked rather low, even taking into account the crisis. But then the property is “peanuts’ in relation to F&N’s assets. So there’s a gd chance that F&N would not ask FCOT for a favour.

As to the best use of the Keypoint money, redeem the convertibles in full: increasing leverage. Rely on F&N’s balance sheet: maybe pay it a fee for “renting”. Worst case: rights issue again. But then I’m a bit of a gambler (like the cowboys and cowgals at Temasek), even if I invest in Reits for the yield. Some habits die hard.

The yield is great, the gearing levels are ok but the lack of a big, conservative brother scares me. In times like this, need a big, stodgy brother like F&N, Keppel, or AMP; or effectively zero gearing (Lippo trusts). I consider CapitaLand too racy for me despite it’s a TLC.

This article (“Residential properties have been the most popular among investors based on its stable return,” said Ishinabe. “Since last year, investors have expanded their interest into other types of properties such as office buildings and commercial facilities.”) on two bulls in Jap commercial property despite supply a’coming reminded me of u’m post on Saizen Reit that tot me the basics of this residental property Jap Reit.

The central bank is worried that retail investors may not understand perps*. I’m worried reit managers may be seduced by investment bankers to use perps indiscrimately. Us investors get shafted. So invest in reits where the sponsor is big, stodgy and conservative (like F&N, or AMP), and has a big stake in reit. If sponsor doesn’t meet the first criteria, think long and hard. I did in case of LMRT, and bot in.

*Bankers said MAS officials had voiced their concerns over retail holdings of perpetual bonds during at least two informal meetings in recent weeks.

The central bank’s scrutiny is preliminary and there is no suggestion of any wrongdoing on the part of the banks or companies involved in the recent flurry of perpetual bond issues. But the discussions show that the regulator is worried individual investors may be taking on too much risk without a full understanding of the product.

So am I. But Indonesia’s economy grew at its slowest pace in 18 months amid a slowdown in exports as demand from key markets such as the US, Europe, China and India weakened.

Worse, the Indonesian rupiah has fallen 8% against the US dollar in the last twelve months: a weak currency may hurt the purchasing power of domestic consumers and dent demand. Remember domestic consumption accounts for nearly 60% of its economy. http://www.bbc.co.uk/news/business-17980123

Regular readers will know that I’m up to my eyeballs in Reits (AMP, Fraser, Lippo and Ascendas India, ya I know AI is a biz trust, but it’s a Reit except in form). Greedy for the yield, what with inflation at above 5%. And no high salary to fall back on. In fact no salary at all. (((

Generally Reits are up 10% in 1Q, and taz without taking into account the payouts! So I’m not complaining.

But I’m getting concerned abt future total returns (price + payouts) when the expected appreciation of the S$* is given as a reason to buy Reits. “If they [investors] expect the dollar to appreciate … there will be more interest in Singapore-dollar-denominated assets … Reits that are listed in Singapore and traded in Singapore dollars will benefit as well,” someone senior from SIAS Research was quoted by MediaCorp as saying recently. And remember that SIAS is the self-proclaimed watch dog for retail investors!

WTF, ever heard that quite a number of Reits are diversified geographically, or are exposed to a specific country like India, China or Indonesia? If a Reit has oversea income, that income would be “reduced” when translated into an appreciating Singapore dollar.

Anyway, as of last week, DBS Vickers liked Mapletree Logistics Trust, Ascendas India Trust and Frasers Commercial Trust. These were Reits to accumulate ahead of payout declarations because it expected the payouts to exceed mkt expectations.

CIMB favoured CapitaMall Trust and Frasers Centrepoint Trust for their retail exposure and strong growth potential. And OCBC prefered industrial REITS, which offer yields in excess of 8% to outperform.

But do remember that unlike companies, Reits have by law to payout out 90% of their income. There is no such thing as keeping something for “a rainy day”. Something that “dividend stocks” like Haw Par, SPH or F&N do. With a Reit, if income drops, the payout drops and the share price will drop to reflect the reduced payout.

As a Reit investor, you got to sell when the going gets good, or be prepared to hold it through down-cycles and be prepared to cough up monies then for rights issues to shore up the financials. Net-net, could use up the payouts you got in gd times.

————–

*Following the recent announcement by the central bank to allow the Singapore dollar to appreciate at a faster pace.

I invest in Reits for the yields and the brokers and local media have discovered Reits as a great defensive play. But SMEs claim that Reits have caused their rentals to escalate unreasonably. JTC has been asked to review its current policy of divesting industrial space to private entities (like its Ascendas).

Business Times – 02 Feb 2012

SMEs blame Reits for growing rental pains

JTC asked to review its current policy of divesting industrial space to private entities

By MINDY TAN

(SINGAPORE) Rising rentals for commercial and industrial space have emerged as a pressing issue for small and medium enterprises (SMEs), and the fingers are pointed squarely at the dominance of real estate investment trusts or Reits as landlords.

The Reits’ drive to enhance yields and returns for unit holders – which usually translates into rental hikes – have left many SME owners, who feel they have limited alternatives here, fuming.

It has also led to calls – including a recommendation by the newly formed SME Committee – for JTC Corp to review its current policy of divesting industrial space to private entities like Reits and return to its previous role of an industrial landlord, so that it can provide ready and affordable industrial space to SMEs.

‘Rentals and capital values of properties are going up, impacting business costs for SME owners and eating into their bottomline,’ said Lawrence Leow, chairman of the SME Committee.

The u/m is an extract from a BT article written by Teh Hooi Ling. Senior Correspondent and CFAer, published on 3 December 2011. It gives some very interesting insights on the yields offered by the various types of Reits, shipping trusts and other business trusts*. (Note some bad news for shipping trusts)

Thanks BT, Ms Teh and the unnamed fund manager, “Merry Christmas and a Happy New Year”.

For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.

Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor.

‘Ships are usually scrapped after about 25-30 years. I think typically they are depreciated over 15 years or so. Even if ships are scrapped after 30 years, shipping trusts should command a higher yield than industrial Reits because the ship lessee can ‘disappear’ with the ship, but not the industrial building tenant.

‘Hospital Reits like Parkway Reit is a rare breed as its revenue is based on a consumer price index formula. You can think of it as having zero vacancy rate (but the main issue is counterparty risk). So given the same counterparty risk, it should trade at a lower yield than retail Reits, which should trade at lower yields than commercial Reits, given the same tenure (because it’s easier to lease out retail units).

‘In turn, commercial Reits should trade at lower yields to industrial, which should trade at lower yields to hospitality (as vacancy rates of hotels/service apartments can be quite high during recessions).

‘Hospitality Reits should trade at lower yields to shipping.

‘But note that industrial can trade at higher yields to hospitality as the former has shorter tenures.

‘As for Hutchison Port Holding Trust and SP Ausnet, I would value them as companies rather than Reits, as usually the rates they charge are prone to fluctuations – unlike Reits and shipping trusts which usually lock customers up for years.

‘SP Ausnet is not structured even as a business trust and pays its dividends out of net profit rather than cash profit. I think every year, it pays out the same dividend per share even though its earnings fluctuate. I would value it the same way I value SingPost.’

Note that unlike a company, a Reit cannot maintain payouts if it hits a bad patch because, at least, 90% of net income has to be paid out. While this is not true of biz trusts, their attraction is that they promise to pay out most of their free cashflow. Companies usually pay out only a portion of their net income, hence there is something in reserve, if they hit a bad patch, and dividends can be maintained for a while more. Hence the importance to investors of what analysts call “dividend cover” which shows how many times over the net income could have paid the dividend. For example, if the dividend cover was 2, this means that the firm’s profit attributable to shareholders was two times the amount of dividend paid out.Not true of Reits, and biz trusts. Got problems, payouts get cut.

In Reits, property assets are held in trust by a trustee and a separate manager is appointed to manage the Reit. The rental income is used to pay out dividends to unit holders.

Like a Reit, the business trust is created by a trust deed. The trustee has legal ownership of the assets, and is also the manager. The business will be in a sector that provides stable income like utilities.

Reit or Business Trust by MoneySense looks at the two different structures in more detail and also spells out the key differences.

It analyses what went wrong in the S-Reit sector in the period up to massive rights issues in 2009.

In a report issued last Thurday, CIMB identified K-Reit Asia, Frasers Commercial Trust (FCOT), Ascott Residence Trust (ART) and Suntec Reit as those likely to engage in equity fundraising in the near future. “The first signs of more cash calls to come have surface.”

The Reit industry is stronger than it was three years ago, CIMB said. Across the sector, the proportion of short-term debt to total debt stood at 8% in September, much lower than the 38% in June 2008. With reduced pressure from short term liabilities, Reits are less likely to make cash calls, even if the industry’s average gearing did climb to 36% (from 34% in 2008). But some Reits -(especially those in the office sector) could be vulnerable to asset devaluation as a downturn looms. Lower property values push up gearing ratios.

According to CIMB K-Reit, ART and Suntec Reit had gearings of 42%, 41% and% respectively at end-Sept, higher than the average of 36%.

The risk of a cash call is greatest for K-Reit. Its aggregate leverage remains high despite a massive rights issue (17 for 20) now underway to fund the purchase of Ocean Financial Centre from parent Keppel Land, and 20% of its debt is due for refinancing next year.

ART not only has high leverage but its European assets could see a devaluation, raising its leverage- a vicious cycle. But if it divests Somerset Grand Cairnhill, which has provisional approval for redevelopment into a residential and hotel project, a near-term cash call could be avoided.

Suntec Reit may not need a cash call until it is ready to acquire Phase 2 of Marina Bay Financial Centre and its capital expenditure needs could be partly met by proceeds from selling Chijmes.

FCOT is a potential candidate for a rights issue because of its relatively high leverage of 37% and low interest coverage ratio. Also, all of its debt is maturing next year. But it could divest KeyPoint. Given F&N as its “big brother”, it could refinance its debt at lower interest rates.

But CIMB believes that Reits are still safe, maintaining its ‘overweight’ call on the sector.

Not as defensive as perceived: We assume coverage of the Singapore industrial Reits sector with a slightly negative stance as we believe that the perception of its defensiveness (due to longer lease tenures) is misplaced.

… we have done thorough analyses on the factory, business parks and warehouses sub-segments, and conclude that we are most positive on the warehouse sector fundamentals.

… flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate due to the oncoming supply pressure (including new supply of decentralised office space).

… upside is limited from here on, given the moderating economic growth outlook, Singapore’s high exposure to the US and European economies and the appreciating currency which will reduce Singapore’s competitiveness as an industrial location of choice.

However … the few less labour-intensive, higher value-add fields, and sectors/ players with better pricing power, like biotechnology, water technology, environmental/energy sciences will likely be less impacted by cost inflation.

This should underpin rental growth for the class of industrial assets exposed to these sectors.

… expect rents in (logistics) warehouse – our preferred industrial sub-segment – to continue to remain strong on the back of fairly strong 90-91 per cent occupancies based on limited supply completion over the next three years. While supply for all factories over the next five years looks manageable, at 9-10 per cent of existing supply of 332 million sq ft NLA for factories and business parks … rents for older-specs factories could come under pressure especially given current economic uncertainties, which will likely impact SMEs and less cost-efficient companies (those at the lower end of the value chain).

… hi-tech and business park rents to moderate, due to the oncoming supply of business parks over the next four years amounting to 29 per cent of existing supply, coupled with existing high vacancies.

M&A increasingly challenging: Despite the supportive capital-raising environment, in our view, with cap rates continuing to compress on the back of rising competition for land (as industrial assets have the highest yields), … becoming increasingly challenging for a Reit to make an accretive acquisition, particularly in Singapore, where capital values today are at 10-year highs.

Based on our analyses of Ascendas Reit (A-Reit), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT), we conclude that (1) A-Reit has the most debt headroom with $1 billion available for future acquisitions; (2) A-Reit and MLT both have the strongest acquisition pipeline, with $1 billion each of injection pipeline from their sponsors; and (3) MINT and MLT have the highest risk of placement, depending on the size of transaction given their gearing levels of 39.3 per cent and 40.6 per cent, respectively.

Three investable names, at this stage: After screening for market cap of over $1 billion and liquidity of US$1.5 million/day, only three of the seven industrial S-Reits are deemed investable: A-Reit, MLT, MINT.

We believe stocks are currently priced for a slowdown but not a recession. Our strategy would be to adopt a stock picking strategy in the property sector. Within the office segment, office landlords are trading in excess of -1 standard deviation to historical RNAV discount while S-Reits are trading at less than 1 SD to the long-term yield.

We believe office stocks have more than priced in the muted outlook and valuations appear attractive currently. While we have widened target price (TP) discounts and lowered TP for landlords given the higher risks going forward, upside to our TP remains significant.

Our top picks remains Keppel Land and UOL. Keppel Land is currently trading at 46 per cent discount to RNAV of $5.57 and offers 40 per cent upside to our lowered TP of $4.18.

We remain positive on UOL, thanks to its multiple growth engines that spans commercial, residential as well as hospitality. Our TP of $4.96, based on a wider 20 per cent discount, offers 9 per cent upside. We have lowered our call on Singland to Hold due to its large 75 to 80 per cent exposure to the office sector.

In the recent equity market sell off, the FSTREI (S-Reit index) while corrected by some 5 per cent versus the 12 per cent and 25 per cent fall in the STI and FSTREH (property developers index) respectively. S-Reits now offer a prospective FY11-12F distribution yield of 6.5-6.7 per cent, which represent a 500 basis points spread above the long-term government bond. It is now closer to -1 standard deviation of the sector historical yield trading range. We believe that S-Reits continue to offer a compelling investment proposition.

We reiterate our preference for retail Reits. Even in the event of an economic downturn, retail Reits’ exposure in necessity shopping (eg supermarkets, F&B outlets) have kept earnings fairly stable. Industrial S-Reits also offer strong stability and visibility given a larger proportion of their income deriving from master-lease structures. While we continue to see hospitality Reits delivering good numbers going into a seasonally busier 2H11, we believe that growth momentum should be slowing down.

We see value emerging in CapitaMall Trust (Buy, TP $2.05) which is our big cap pick with attractive FY11-12F yields of about 5.3-5.9 per cent. Mapletree Commercial Trust (Buy, TP $1.09) is attractive for its strong organic growth coming off from a first renewal cycle at its VivoCity retail mall. Among the industrial Reits, Mapletree Logistics Trust MLT (Buy, TP $1.07) stands out post an active H1 FY11 and is poised to deliver strong earnings growth into H2 FY11. We continue to see relative value amongst the smaller cap S-Reits – Cache (Buy, TP S$1.07) and Frasers Commercial Trust (Buy, TP $1.05), which offer higher than average yields with limited earnings downside.

“The current yield gap between S-Reits and the 10-year government bond is attractive to us at 5.1 percentage points versus 0.8 percentage point during the 2007 boom, and an average of 3.4 percentage points over the past seven years,” said Royal Bank of Scotland analysts in a report last week.

The report put S-Reits yields for 2011 and 2012 at 6.7 per cent and 7.1 per cent respectively. The high yields now being provided by S-Reits are well supported by a stable rental outlook, low interest costs and acquisitive growth potential, the RBS analysts said.

So what can go wrong? Nomura Singapore said that one of the current concerns of investors in the Reits space is the potential risk of recapitalisation if asset values were to fall significantly. In simple English, investors are afraid of rights issues if the gearing of Reits goes sky high if property values supporting the loans collapse. This happened in late 2008.

Even if property values don’t collapse, Reits could face banks refusing to renew their credit facilities, and asking for their money back if the banks face a liquidity crunch. This too happened in late 2008.